Banks narrow home equity withdrawals

DEVASTATING: "It's financially devastating to us and our ability to keep our home. They said a computer generated census determined the value of our property" says homeowner Roberta Lacken.She and her husband own a home in Anaheim and investment property in San Bernardino. They have a second mortgage on the San Bernardino property with a balloon payment of $28,000 next year. They had planned to use the HELOC on the Anaheim home to pay that balloon payment, but Washington Mutual recently slashed their HELOC due to falling home prices. Lacken said they will lose the property. JEBB HARRIS, THE ORANGE COUNTY REGISTER

If your HELOC is cut

Banks are reducing home equity lines of credit in Orange County. If it happens to you, don't panic, here are some steps you can take:

Call lender: Lenders say they have a process for customers to protest a HELOC reduction. Usually, this begins with calling the bank's corporate offices, and not visiting a local branch.

Get an appraisal: Some lenders require borrowers to get an appraisal from an expert recommended by the lender. The homeowner may have to pay for this appraisal.

Bank may reinstate HELOC: If the appraisal values the home well above the first mortgage, then the lender may reinstate the full value of the HELOC. The lender may even refund the appraisal fee the consumer paid. But since there is no guarantee the appraisal will value the home high enough, a homeowner may pay for an appraisal for nothing.

Roberta Lacken fears her retirement is in jeopardy after her lender slashed the amount she can borrow against her Anaheim home.

Lacken, 50, said Washington Mutual reduced by about $20,000 the amount she can borrow on her home equity line of credit, known as a HELOC. She had planned to use that money to make a balloon payment on a second mortgage she and her husband have on an apartment building in San Bernardino.

Now she fears they won't be able to come up with the $28,000 they have to pay next year.

"We don't know what we are going to do," Lacken said. "We could be just another number on the foreclosure list."

Lacken said she and her husband were hoping the apartment building would help fund their retirement someday. She tends bar at a hotel in Anaheim and her husband drives a limousine.

Her case is hardly unique. Homeowners with HELOCs may want to check the fine print of their contract - there's generally a clause that says a bank can slash the line overnight if it finds a good reason. Two most common reasons: the property value has declined or the borrower's credit profile has deteriorated.

Several lenders have reduced HELOCs en masse in areas of declining home prices, including Orange County, experts say. Lenders are trying to reduce their exposure to potential loan losses. The percentage of HELOCs more than 30 days past due rose to 1.10 percent during the first quarter, the highest since 1997, reports the American Bankers Association.

Some experts fear the HELOC reductions could hurt the economy and housing market. They said consumers will spend less if they have less access to credit, which could hurt an economy dependent on consumer spending.

And some experts say consumers who needed their HELOCs to stay afloat financially will now default on their primary home loans, adding to already record foreclosures in Orange County.

Originations of HELOCs and other second mortgages have fallen off a cliff. DataQuick reports banks made $555 million of such loans in April, less than half the $1.2 billion made a year earlier. (It doesn't track outstanding balances.)

Washington Mutual, in an email to the Register, said it reduces home equity lines based on a borrower's payment history, creditworthiness and the value of his or her property.

"Given the current housing market, WaMu, as well as other lenders, have taken the fiscally responsible steps to reduce select credit lines when warranted by declining home values," the company said.

The lender also said it's sticking to terms agreed to by customers.

Home prices in Orange County have plummeted from 2006 highs. DataQuick reported the median selling price for O.C. residences in May was $485,000 — the first time a month's pricing has been below half-a-million dollars since March 2004.

But not all homes are equally impacted by the slump. A handful of WaMu's borrowers, including Lacken, said the thrift relied on a computer model to determine the current value of their home. They say the model is way off.

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